[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)]
[Notices]
[Pages 3933-3938]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1854]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23004; 812-10134]


Daily Money Fund, et al.; Notice of Application

January 20, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'') granting an exemption under section 6(c) of 
the Act from sections 13(a), 18(f), and 21(b) of the Act, under 
sections 6(c) and 17(b) of the Act from sections 17(a)(1) and (3) of 
the Act, and under rule 17d-1 under the Act to permit certain 
transactions in accordance with section 17(d) of the Act and rule 17d-
1.

-----------------------------------------------------------------------

SUMMARY OF APPLICATION: The requested order would permit certain 
registered open-end funds and unregistered funds to enter into 
insurance agreements with an affiliated mutual insurance company (the 
``Mutual Company''). The Mutual Company would provide limited insurance 
coverage for certain money market assets held by the funds.

APPLICANTS: Daily Money Fund, Fidelity Aberdeen Street Trust, Fidelity 
Advisor Series I, Fidelity Advisor Series II, Fidelity Advisor Series 
III, Fidelity Advisor Series IV, Fidelity Advisor Series V, Fidelity 
Advisor Series VI, Fidelity Advisor Series VII, Fidelity Advisor Series 
VIII, Fidelity Beacon Street Trust, Fidelity Boston Street Trust, 
Fidelity California Municipal Trust, Fidelity California Municipal 
Trust II, Fidelity Capital Trust, Fidelity Charles Street Trust, 
Fidelity Commonwealth Trust, Fidelity Concord Street Trust, Fidelity 
Congress Street Fund, Fidelity Contrafund, Fidelity Court Street Trust, 
Fidelity Court Street Trust II, Fidelity Destiny Portfolios, Fidelity 
Devonshire Trust, Fidelity Exchange Fund, Fidelity Financial Trust, 
Fidelity Fixed-Income Trust, Fidelity Government Securities Fund, 
Fidelity Hastings Street Trust, Fidelity Hereford Street Trust, 
Fidelity Income Fund, Fidelity Institutional Cash Portfolios, Fidelity 
Institutional Tax-Exempt Cash Portfolios, Fidelity Investment Trust, 
Fidelity Magellan Fund, Fidelity Massachusetts Municipal Trust, 
Fidelity Money Market Trust, Fidelity Mt. Vernon Street Trust, Fidelity 
Municipal Trust, Fidelity Municipal Trust II, Fidelity Newbury Street 
Trust, Fidelity New York Municipal Trust, Fidelity New York Municipal 
Trust II, North Carolina Capital Management Trust, Fidelity Phillips 
Street Trust, Fidelity Puritan Trust, Fidelity Revere Street Trust, 
Fidelity School Street Trust, Fidelity Securities Fund, Fidelity Select 
Portfolios, Fidelity Summer Street Trust, Fidelity Trend Fund, Fidelity 
Union Street Trust, Fidelity Union Street Trust II, Fidelity U.S. 
Investments-Bond Fund, L.P., Fidelity U.S. Investments-Government 
Securities Fund, L.P., Variable Insurance Products Fund, Variable 
Insurance Products Fund II, Variable Insurance Products Fund III 
(collectively, the ``Trusts''); Fidelity Canadian Asset Allocation 
Fund, Fidelity U.S. Money Market Fund, Fidelity Asset Manager Fund, 
Fidelity Canadian Bond Fund, Fidelity Canadian Growth Company Fund, 
Fidelity Canadian Income Fund, Fidelity Canadian Short Term Asset Fund, 
Fidelity Capital Builder Fund, Fidelity Emerging Markets Bond Fund, 
Fidelity Emerging Markets Portfolio Fund, Fidelity European Growth 
Fund, Fidelity Far East Fund, Fidelity Growth America Fund, Fidelity 
International Portfolio Fund, Fidelity Japanese Growth Fund, Fidelity 
Latin America Growth Fund, Fidelity North American Income Fund, 
Fidelity RSP Global Bond Fund, Fidelity Small Cap America Fund, 
Fidelity True North Fund, Fidelity Managed Income Fund, Fidelity Focus 
Consumer Industries Fund, Fidelity Focus Financial Services Fund, 
Fidelity Focus Health Care Fund, Fidelity Focus Natural Resources Fund, 
Fidelity Focus Technology Fund (collectively, the ``Canadian Funds''); 
Fidelity Advisor U.S. Large-Cap Stock Fund (Bermuda) Ltd., Fidelity 
Advisor World Europe Fund (Bermuda) Ltd., Fidelity Advisor World 
Southeast Asia Fund (Bermuda) Ltd., Fidelity World Advisor World U.S. 
Limited Term Bond Fund (Bermuda) Ltd., Fidelity Advisor World U.S. 
Government Investment Fund (Bermuda) Ltd., Fidelity Advisor World U.S. 
Treasury Money Fund

[[Page 3934]]

(Bermuda) Ltd. (collectively, the ``Fidelity Advisor World Funds''); 
Fidelity Investments Canada, Ltd. (``FICL''); Fidelity Management and 
Research Company (``FMR''); Fidelity Distributors Corporation 
(``FDC''); National Financial Services Corporation (``NFSC'') \1\; each 
Trust and each registered investment company and series thereof that 
are currently or in the future advised by FMR or a person controlling, 
controlled by, or under common control with FMR (collectively with FMR, 
the ``Adviser'') or distributed by FDC or NFSC (collectively, the 
``Registered Funds''); the Fidelity Advisor World Funds, the Canadian 
Funds, and other pooled investment funds advised or in the future 
advised by the Adviser, that are offered exclusively outside the United 
States to non-U.S. residents (the ``Unregistered Funds''); and state 
and local entities or accounts thereof advised or in the future advised 
by the Adviser that are exempt from regulation under the Act pursuant 
to section 2(b) of the Act (the ``2(b) Entities'') (collectively, the 
Registered Funds, the Unregistered Funds, and the 2(b) Entities are the 
``Funds'').
---------------------------------------------------------------------------

    \1\ The terms ``FDC'' and ``NFSC'' include any other company 
controlled by or under common control with FMR that acts in the 
future as distributor for the Trusts or their series.

FILING DATES: The application was filed on May 7, 1996, and amended on 
---------------------------------------------------------------------------
December 3, 1997.

HEARING OR NOTIFICATION OF HEARING. An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on February 16, 
1998, and should be accompanied by proof of service on applicants, in 
the form of an affidavit, or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues consented. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, 82 Devonshire Street, Boston, Massachusetts 02109.

FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Senior Counsel, at (202) 942-0572 (Division of 
Investment Management, Office of Investment Company Regulation), or 
Mercer E. Bullard, Special Counsel, at (202) 942-0659 (Division of 
Investment Management, Office of Chief Counsel).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 5th Street, NW., Washington, DC 
20549 (telephone (202) 942-8090).

Applicants' Representations

A. Overview

    1. Each of the Registered Funds is an open-end investment company 
registered under the Act and offers one or more portfolios. The 
Fidelity Advisor World Funds are portfolios of mutual funds established 
under the laws of Bermuda. The Canadian Funds are portfolios 
established under the laws of Canada. The only 2(b) Entity that 
currently may rely on the requested order is the Massachusetts 
Municipal Depository Trust (``Municipal Trust''), which is established 
pursuant to Massachusetts law.\2\
---------------------------------------------------------------------------

    \2\ In order to participate in the Mutual Company, a 2(b) Entity 
(including the Municipal Trust) would have to determine that the 
proposed investments in instruments through the proposed 
transactions are consistent with state laws or administrative rules 
regulating the 2(b) Entity. If not, it must seek to have those laws 
or rules amended. Accordingly, the Municipal Trust is not named as 
an applicant because it considers it premature to join formally.
---------------------------------------------------------------------------

    2. The Adviser, an investment adviser registered under the 
Investment Advisers Act of 1940, acts as investment adviser to each 
Registered Fund and its portfolios and provides the Registered Funds 
with administrative services. FICL acts as the investment adviser to 
the Canadian Funds. FDC and NFSC act as the distributors of all the 
Registered Funds. FMR, FICL, FDC, and NFSC are all direct or indirect 
subsidiaries of FMR Corp.
    3. Applicants propose that certain Funds (``Participating Funds'') 
enter into insurance agreements with the Mutual Company. The Mutual 
Company would provide insurance coverage for certain loss events 
(``Loss Events'') described below with regards to certain money market 
securities (``Insurable Assets''). Initially, applicants expect that 
the only Participating Funds will be U.S. dollar denominated money 
market funds.\3\ Other types of Funds may participate in the future if 
the Fund's Adviser and board of trustees determine that the insurance 
would be of value to the Fund and that the Fund had an independent need 
for the insurance coverage.
---------------------------------------------------------------------------

    \3\ Money market funds are funds that have as their objective 
the generation of income and the preservation of capital. Money 
market funds are subject to rule 2a-7 under the Act, which contains 
several conditions limiting the risk and volatility of securities in 
which a money market fund may invest.
---------------------------------------------------------------------------

B. Mutual Company Operations

    1. The Mutual Company will be organized as a Bermuda mutual 
insurance company and will be governed by a board of directors 
consisting of employees of FMR or FMR Corp. and other persons 
associated with the Mutual Company. As a mutual insurance company, the 
Mutual Company will not issue stock. Proprietary interests in the 
Mutual Company will belong only to the Participating Funds as 
policyholders. Each Participating Fund will have equal voting rights, 
i.e., each Participating Fund will have one vote. The board of trustees 
(``Trustees'') of each Registered Fund will exercise the Fund's voting 
rights. The Funds will have voting rights with respect to (a) the 
election and removal of the Mutual Company's board of directors; (b) 
the dissolution or liquidation of the Mutual Company; (c) the amendment 
of the Mutual Company's articles of incorporation or other governing 
instrument; (d) any merger, consolidation or sale of substantially all 
of the Mutual Company's assets; and (e) additional matters relating to 
the Mutual Company as may be required or authorized by law.
    2. Employees of the Adviser will be involved in the day-to-day 
operations of the Mutual Company, including determining and 
implementing the investment policies of the Mutual Company and managing 
its assets. The Mutual Company will employ an unaffiliated third party 
in Bermuda to conduct its administrative and ministerial activities.
    3. The Mutual Company will operate on a break-even basis and any 
reserves and surplus will be used (a) to increase the Mutual Company's 
aggregate coverage and/or the risk retained by the Mutual Company and/
or (b) to decrease the premiums charged by the Mutual Company. The 
Mutual Company will pay no dividends or distributions, and neither the 
Funds' interest in the Mutual Company nor the policies will be 
transferable. A Participating Fund that terminates its participation 
prior to the liquidation of the Mutual Company will not receive any 
proceeds, regardless of whether the Mutual Company has a surplus at the 
time. If the Mutual Company is liquidated when it has a surplus, 
Participating Funds at that time will divide the proceeds based on 
their relative levels of premium payments to the Mutual Company during 
its existence.

[[Page 3935]]

C. Insurance Coverage

    1. Insurable Assets are securities that, at the time of purchase, 
are money market securities eligible pursuant to rule 2a-7 under the 
Act (including repurchase agreements), other than: (i) U.S. Treasury 
securities backed by the full faith and credit of the U.S. Government, 
and (ii) other obligations all of the principal and interest of which 
are backed by the full faith and credit of the U.S. Government.
    2. Loss Events include losses incurred by a Participating Fund in 
connection with a nonpayment of principal or interest by the issuer 
when due and payable, or the institution of a bankruptcy, insolvency, 
or similar proceeding with respect to the issuer and/or credit 
enhancement provider (if any) of an Insurable Asset. Loss Events also 
include losses in connection with a default relating to a credit 
enhancement. In addition, Loss Events include the inability of a Fund 
to recover fully the amount loaned under a repurchase agreement because 
of an event of default under the contract (``repo-related Loss 
Event''), and losses resulting if certain payments to a Participating 
Fund were subsequently considered a preference in bankruptcy 
(``preference-related Loss Event''). In the future, the definition of 
Loss Events could be expanded.
    3. The Adviser or the Mutual Company will retain insurance 
professionals to set the aggregate annual premium based upon their 
assessment of the risk of Loss Events occurring with respect to 
Insurable Assets in which the Funds invest. The insurable 
professionals, using actuarial standards, will allocate the premium 
among the Participating Funds based on the risk characteristics of the 
different types of Insurable Assets held by each Fund.
    4. The insurance policy (``Policy'') written by the Mutual Company 
will be structured as a claims-made policy. The Policy will have a term 
of one year and will be renewable. Neither the Mutual Company nor a 
Participating Fund will be permitted to terminate or decrease its 
coverage during a policy year. The Policy will have no cash surrender 
value, will not be transferable, and will not provide for the payment 
of any dividend or other distribution.
    5. Loss recoveries by the Participating Funds will be limited to 
$100 million annually in the aggregate. A Participating Fund will 
recover for a Loss Event only to the extent that the amount of its loss 
exceeds the deductible amount of 0.30% of a Participating Fund's 
Insurable Assets, which will be applied on a per loss basis for each 
Fund. There are no limits (other than the Policy limit) on the amount 
of loss recoverable by a Participating Fund in a particular year or 
with respect to any single issuer.
    6. The Mutual Company also would provide coverage for certain 
wrongful acts on the part of past or present officers, Trustees, or 
employees of a Participating Fund that result in the Fund sustaining a 
Loss Event. This coverage would not apply to FMR in its capacity as 
investment adviser to the Funds. Wrongful acts would include any breach 
of duty, neglect, error, misstatement, misleading statement, omission 
or other act committed or wrongfully attempted by an employee resulting 
in a Participating Fund sustaining a loss attributable to a Loss Event. 
The coverage is not fidelity bond coverage and will not be subject to 
rule 17g-1 under the Act. The coverage would generally expand the 
existing errors and omissions coverage maintained by a Participating 
Fund by covering losses not currently covered by the Fund's existing 
policy. For example, the Mutual Company would cover losses that result 
from wrongful acts in connection with the purchase of an investment 
that was not rule 2a-7 eligible and that are in an amount that exceeds 
the amount covered under the Participating Fund's existing errors and 
omissions policy.

D. Mutual Company Capitalization

    1. As noted above, the Mutual Company will have an annual aggregate 
Policy limit of $100 million. The Mutual Company initially will cover 
the first $30 million in claims from payments collected from the 
Participating Funds and Fidelity, with third-party reinsurance covering 
the remaining $70 million. The first $30 million will be capitalized by 
the following sources: (i) A one-year loan by Fidelity of $250,000 
(``Fidelity Note''), (ii) a one-year demand note by the participating 
funds of $450,000 in the aggregate (``Fund Notes''), (iii) first-year 
premiums of approximately $2.7 million, (iv) assessable premiums of 
approximately $11 million, and (v) a commitment by Fidelity of 
approximately $17 million. If the Mutual Company's reserves are 
insufficient to cover claims, it will use its other assets in the 
following order: (a) The Fund Notes, (b) the FMR Note, (c) the premium 
assessment, (d) FMR's commitment, and (e) reinsurance.
    2. The amount of each Fund Note will be determined on a pro rata 
basis in the same proportion as the Fund's premium payment. Because the 
Fund Notes are demand notes, a Participating Fund will not be required 
to pay any monies to the Mutual Company unless these are one or more 
covered Loss Events exceeding the Mutual Company's available reserves 
and surplus funds. Fund Notes will be drawn upon and will be repaid to 
the Funds by the Mutual Company on a pro rata basis.
    3. In addition, because annual premiums in the initial years of 
operation will be insufficient to permit the Mutual Company to provide 
the $30 million of coverage it will retain, the Company's insurance 
policies will be ``assessable.'' Thus, if a Loss Event occurs, each 
Participating Fund will be subject, in addition to its annual premium 
payments, to a special premium assessment initially estimated to be 
approximately two and one half times its annual premium payment. A 
Fund's annual and special assessment premiums will be paid from the 
general assets of the Fund, except that FMR will pay the premiums for 
Funds with ``all-inclusive'' management agreements, under which FMR is 
contractually obligated to pay all Fund expenses. The special premium 
assessment will be made on a pro rata basis by each Participating Fund 
in the same proportion as the Fund's then current pro rata shares of 
its regular premium payment, regardless of which Fund actually sustains 
a Loss Event. If reserves and surplus funds in the Mutual Company build 
up sufficiently, applicants expect the assessment rate to decline over 
time.
    4. Assuming that all the Fund Notes are fully drawn upon and the 
Funds are subject to the maximum special premium assessment, applicants 
anticipate that the maximum commitment by all Participating Funds 
(which as of October 31, 1997, had approximately $98 billion in net 
assets) to the Mutual Company would initially amount to approximately 
$11 million resulting in a projected maximum commitment by the Funds 
that would not exceed .04% of the Funds' net assets. Thus, any monies 
required to be paid by a Participating Fund pursuant to the Fund Notes 
or special assessment in a given year would not cause the net asset 
value of a money market Fund to be reduced below $1.00 per share.
    5. The Mutual Company also will receive a $17 million commitment 
from FMR backed by a letter of credit to cover Loss Events exceeding 
the Mutual Company's reserves and surplus funds and the Participating 
Funds' assessable policies. FMR's commitment to cover losses would 
stand behind the premiums and assessable policies of the Participating 
Funds and is expected to decline over time as reserves increase. The 
Mutual Company will pay FMR an

[[Page 3936]]

annual fee, at market rates, for the commitment. The rate of the annual 
fee will be the same amount as the lowest rate FMR would then pay a 
bank for a letter of credit in a comparable amount. The reinsurance 
obtained by the Mutual Company will stand behind the premiums, 
assessable policies, and FMR's commitment.

E. Insurance Claims

    1. The order of the payment of claims will be based on the date the 
loss was incurred. In the event of multiple losses occurring on the 
same date in excess of the Policy limit, claims will be paid pro rata 
based on the amount of a fund's loss in excess of its deductible.
    2. A Participating Fund that experiences a Loss Event typically 
would receive payment within approximately 30 days of filing an 
acceptable proof of loss with the Mutual Company. Entities providing 
reinsurance will be obligated to pay the Mutual Company within the same 
period of time. Normal insurance subrogation rights will be provided in 
connection with the insurance coverage.
    3. Beginning the day of the Loss Event until the proceeds of a 
Participating Fund's claim are received from the Mutual Company, the 
net asset value of a Participating Fund that sustains a Loss Event will 
be computed by recording the amount of the expected recovery as a 
receivable on the books of the Fund, subject to the Policy limit. Prior 
to recording a receivable, a Participating Fund will have contacted the 
Mutual Company upon the occurrence of a Loss Event to determine the 
amount of available coverage. The recovery will be determined by 
calculating the amount of the Participating Fund's loss and comparing 
this number to the coverage remaining under the Policy limit for the 
policy year in question. The relevant receivable on a Participating 
Fund's books will be computable and recorded prior to the Fund's next 
net asset value determination following a Loss Event.

F. Disclosure of the Insurance

    1. A brief description of the nature and extent of the insurance 
coverage will be contained in each Registered Fund's registration 
statement and, if required by generally accepted accounting principles 
(``GAAP''), its financial statements. The insurance coverage provided 
by the Mutual Company will not be used in connection with the marketing 
of the sale of shares of the Registered Funds, and thus will not be 
discussed in any marketing or sales literature distributed with respect 
to any Registered Fund.

Applicants' Legal Analysis

A. Sections 13(a) and 18(f)

    1. Section 18(f)(1) of the Act generally prohibits a registered 
open-end investment company from issuing any senior security. Section 
13(a)(2) of the Act requires that a registered investment company 
obtain shareholder authorization before issuing any senior security not 
contemplated by the recitals of policy in its registration statement. 
Section 13(a)(3) of the Act provides that no registered investment 
company will, unless authorized by the vote of a majority of its 
outstanding voting securities, deviate from any investment policy that 
is changeable only if authorized by shareholder vote, or deviate from 
any policy recited in its registration statement pursuant to section 
8(b)(3) of the Act. Each Registered Fund has a fundamental investment 
policy prohibiting the issuance of senior securities except as 
permitted under the Act. Applicants request relief from sections 13(a) 
and 18(f) to the extent that the assessable feature of the policy 
entered into by each Registered Fund and the obligation of each Fund 
pursuant to the Fund Notes could be deemed the issuance of senior 
securities by the Registered Funds, and thus be prohibited by section 
18(f) and in contravention of a Registered Fund's fundamental policy 
against issuing senior securities pursuant to section 13(a)(2), and its 
deviation from that policy in contravention of section 13(a)(3). Relief 
from section 13(a)(3) would extend only to existing Registered Funds 
with a fundamental investment restriction prohibiting investments in 
senior securities and to any other Registered Funds that have such 
policies at the time the Adviser becomes the Fund's investment adviser.
    2. Section 6(c) of the Act permits the SEC to exempt any person or 
transaction from any provision of the Act, if the exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
policies of the Act. For the reasons provided below, applicants argue 
that the requested order meets the section 6(c) standards.
    3. Applicants state that sections 13(a) and 18(f) resulted from 
Congress' desire to eliminate certain practices including (a) heavy 
borrowings by investment companies from the public without adequate 
assets and reserves, (b) the complexity of capital structures which 
induced investment companies to invest in risky securities to produce 
income necessary to cover the high cost of borrowings, (c) the freedom 
of investment companies to borrow funds for speculation, and (d) the 
propensity of senior securities to mislead investors by conveying false 
impression of freedom from risk, and to increase the speculative nature 
of both the common stock and senior securities of investment companies.
    4. Applicants state that the assessable feature of the policy and 
the obligations created by the Fund Notes will not give rise to the 
abuses at which sections 13(a) and 18(f) are directed. Applicants 
submit that neither the assessable feature nor the Fund Notes will 
involve speculative trading or leverage in the typical sense because a 
Registered Fund will not be buying portfolio securities with borrowed 
money. Applicants believe that the proposed insurance coverage will not 
create an unduly complicated capital structure. Applicants contend 
that, because of the limited coverage and the deductible, the insurance 
coverage will not induce a Registered Fund to invest in risky 
securities.
    5. Applicants further state that neither the special assessment 
feature nor the Fund Notes will change the risk/reward characteristics 
of any Registered Fund. Applicants submit that payment of monies by a 
Registered Fund pursuant to the Fund Notes will have no effect on the 
Fund's net asset value because the Fund will record a receivable on its 
books and will receive interest at market rates on those monies. 
Further, applicants believe that, even assuming that all the Fund Notes 
are drawn upon and the Funds are subject to the maximum special 
assessment, it is projected that the maximum amount payable by the 
Participating Fund will be de minimis in relation to their total net 
assets.

B. Sections 17(a) (1) and (2)

    1. Sections 17(a) (1) and (2) of the Act generally prohibit sales 
or purchases of securities to or from a registered investment company 
by any affiliated person of the company or any affiliated person of an 
affiliated person. Section 2(a)(3) of the Act defines an affiliated 
person of an investment company to include any investment adviser of 
the investment company and anyone under common control with the 
investment company. Under section 2(a)(3), FMR, as investment adviser 
of each of the Funds, is an affiliated person of each Fund. Further, 
because the Funds either share a common investment adviser or have an 
investment adviser that is under common control with those of the other 
Funds, and most Registered Funds also share a common board of trustees 
or

[[Page 3937]]

other governing body, each Fund may be deemed to be under common 
control with all other Funds and, therefore, may be deemed to be an 
affiliated person of those Funds.
    2. Each Participating Fund will have voting rights in the Mutual 
Company. To the extent that the Mutual Company could be deemed to be 
controlled by, or under common control with, the Participating Funds or 
the Adviser and thus an affiliated person of the Registered Funds, 
applicants believe that the insurance coverage could be deemed to be 
controlled by, or under common control with, the Participating Funds or 
the Adviser and thus an affiliated person of the Registered Funds, 
applicants believe that the insurance coverage could be deemed 
``property'' subject to the prohibition of section 17(a)(1) against an 
affiliate of a Registered Fund selling property to the Fund. In 
addition, applicants state that FMR's commitment to the Mutual Company 
could be viewed as a sale of property to the Registered Funds (as the 
indirect beneficiaries of the commitment and payers of the fee) by an 
affiliated person of the Registered Funds under section 17(a)(1). 
Further, applicants state that FMR's contribution of cash to the Mutual 
company in exchange for the FMR Note could be considered the sale of a 
security for property by the Mutual Company, a company controlled by 
the Registered Funds, to FMR under section 17(a)(2). Applicants request 
exemptions from the provisions of sections 17(a) (1) and (2) to permit 
these transactions.
    3. Section 17(b) of the Act permits the SEC to grant an order 
permitting a transaction otherwise prohibited by section 17(a) if it 
finds that the terms of the proposed transaction are fair and 
reasonable and do not involve overreaching on the part of any person 
concerned. For the reasons stated below, applicants believe that the 
terms of the transactions meet the standards of sections 6(c) and 
17(b).
    4. Applicants state that the insurance coverage will provide the 
Participating Funds and their shareholders with a means of reducing 
their risk of loss from defaulting Insurable Assets and repo- and 
preference-related Loss Events and, in some cases, protection against 
their net asset value per share dropping below $1.00. Applicants 
believe that the proposed transactions do not involve overarching 
because the coverage could not be obtained from an unaffiliated third-
party issuer at a comparable price. In addition, applicants state that 
the proposed arrangement is consistent with the policies of each 
Participating Fund.

C. Sections 17(a)(3) and 21(b)

    1. Section 17(a)(3) of the Act generally prohibits an affiliated 
person or an affiliated person of an affiliated person of a registered 
investment company from borrowing money or other property from the 
company or from any company controlled by the registered company except 
in certain circumstances not relevant here. Section 21(b) makes it 
unlawful for any registered investment company to lend money or 
property to any person, directly or indirectly, if the person controls 
or is under common control with the registered company.
    2. Applicants seek relief from section 17(a)(3) and from section 
21(b) to the extent that the Fund Notes, if drawn upon by the Mutual 
Company, could be deemed the borrowing of money or property from the 
Registered Funds by an affiliated person. Applicants state that 
sections 17(a)(3) and 21(b) were intended to prevent a party with 
strong potential adverse interests and influence over the investment 
decisions of a registered investment company from causing or inducing 
the investment company to engage in lending transactions that are 
detrimental to the best interests of the investment company and its 
shareholders. Applicants believe that the Fund Notes do not raise these 
concerns because: (a) The amount of each Fund's Fund Note will be 
determined on a pro rata basis in the same proportion as the Fund's 
then current pro rata share of its regular premium payment, (b) all 
Fund Notes will have the same terms, which will be fair and reasonable 
to each Fund, and (c) any interest received by the Funds on the Fund 
Notes will be determined according to a market rate.

D. Section 17(d) and Rule 17d-1

    1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
an affiliated person of a registered investment company or an 
affiliated person of an affiliated person, acting as principal, from 
participating in any joint arrangement in which the investment company 
participates unless the arrangement has been approved by the SEC. 
Applicants believe that the involvement of FMR and the Participating 
Funds in the Mutual Company could be deemed to constitute participation 
in a joint arrangement because of: (a) The payment of premiums by the 
Funds to the Mutual Company for insurance coverage and the rights of 
the Funds to certain payments from the Mutual Company in connection 
with a Loss Event, (b) the assessable feature of the Policies, (c) the 
receipt by FMR from the Mutual Company of interest on the FMR Note and 
an annual fee for its commitment, and (d) FMR's contribution of cash to 
the Mutual Company in exchange for the FMR Note.
    2. Rule 17d-1(b) provides that, in determining whether to approve a 
transaction, the SEC is to consider whether the proposed transaction is 
consistent with the provisions, policies, and purposes of the Act, and 
the extent to which the participation of the investment companies is on 
a basis different from or less advantageous than that of the other 
participants. For the reasons stated below, applicants believe that the 
requested relief meets these standards.
    3. Applicants state that the Registered Funds will not participate 
in the arrangement on a basis that is different from or less 
advantageous than other Participating Funds because each Fund's premium 
will be allocated in accordance with the risk characteristics of the 
different types of Insurable Assets in which the Funds invest based 
upon actuarial standards. Applicants state that each Participating 
Fund's assessable portion will be on a pro rata basis according to its 
share of the regular premium payments. Applicants also state that, in 
the case of multiple loss events in a single year, the Mutual Company 
will make payments chronologically based on the date on which a Loss 
Event occurs up to the annual Policy limit. Applicants note that, while 
a Registered Fund may not recover on a loss in a particular year, all 
Registered Funds will be treated in the same manner.
    4. Applicants state that the Mutual Company is intended to provide 
substantial benefits to the Participating Funds, including protection 
against losses incurred from defaulting Insurable Assets and from repo- 
and preference-related Loss Events. Further, applicants note that the 
interest received by FMR on the FMR note and the fee it will receive 
for its commitment to cover losses of the Mutual Company will be 
determined according to a market rate. Applicants state that the fees 
will compensate FMR for assuming significant economic risks and that 
FMR will receive no other direct benefits from its involvement with the 
Mutual Company.

Applicants' Conditions

    Applicants agree that any order of the SEC granting the requested 
relief will be subject to the following conditions:
    1. The Trustees, including a majority of the Trustees who are not 
``interested persons'' of any Registered or Unregistered Fund, as 
defined in section

[[Page 3938]]

2(a)(19) of the Act (``Disinterested Trustees''), will initially and at 
least annually thereafter, in each year a Registered Fund participates 
in the insurance arrangement, determine (a) that the Policy is in the 
best interests of the Registered Fund and its shareholders, (b) that 
any amounts paid or potentially payable to the Mutual Company by the 
Registered Fund including, without limitation, the premiums, the 
special assessable premium, and the Fund Notes, are fair and reasonable 
to the Registered Fund, (c) after reviewing all claims paid or denied 
by the Mutual Company, that the settlement of all claims has been 
reasonable and fair to the Registered Fund, and (d) that any procedures 
adopted pursuant to condition 3 have been complied with.
    2. Any conflicts that may arise concerning the Participating Funds 
relating to the operation or policies of the Mutual Company will be 
resolved on an equitable basis by a committee of the Disinterested 
Trustees of the Registered Funds.
    3. The Trustees of each Registered Fund, including a majority of 
the Disinterested Trustees, will adopt procedures that are reasonably 
designed to provide that the conditions in the application have been 
complied with. The procedures will include, without limitation, the 
guidelines set forth in the Statement of Policy Regarding Coverage, 
attached as Exhibit D to the application, as it may be amended from 
time to time.
    4. Participation by a Registered Fund in the Mutual Company will be 
consistent with the policy of the Fund, as recited in its registration 
statement and reports filed under the Act.
    5. The nature and extent of the insurance coverage will be briefly 
described in each Registered Fund's current registration statement and, 
if required by GAAP, in each Registered Fund's financial statements. 
Other than this disclosure, the insurance coverage provided by the 
Mutual Company will not be used in connection with the marketing of the 
sales of shares of the Registered Funds.
    6. Each Registered Fund will maintain and preserve permanently in 
an easily accessible place a written copy of the procedures (and any 
modifications thereto) described in condition (3) and will maintain and 
preserve for a period of not less than six years from the end of the 
fiscal year in which any Fund participated in the Mutual Company, the 
first two years in an easily accessible place, a written record 
relating to the premiums paid and any claims made by the Fund and any 
action taken by the Mutual Company with respect to the claim, and the 
information or materials upon which the determinations described in 
condition (1) were made. The Mutual Company will make its records 
available to the Trustees and the staff of the SEC upon request.
    7. The Mutual Company will pay FMR for its commitment to cover 
losses at a rate not to exceed the lowest rate FMR would then be paying 
a bank for a letter of credit in a comparable amount.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-1854 Filed 1-26-98; 8:45 am]
BILLING CODE 8010-01-M